Finance 516: Week 2: Mini Case Assignment
1. Exxon Mobil Corporation (XOM): Major Integrated Oil & Gas [ENERGY]
Exxon Mobil Corporation (XOM) is headquartered in Irving Texas; website: www.exxonmobil.com. Exxon
Mobil is a member of the Dow Jones Composite Dow Industrials in the Basic Materials Sector as a
leading member of the Major Integrated Oil & Gas Industry and/or Energy sector.
2. What are the operating risks of the company?
As a global producer of oil, gas, and petrochemical businesses there are risks within and not within the
Company’s control which could negatively impact Exxon Mobil Corporation’s business. Risk factors
include: Economic, Government and Political, Legal, and Management Effectiveness, and additional
operational risks. Management Effectiveness and operational risks being within Exxon’s scope of control
consist of exploration and development programs and Exxon’s ability to maintain and grow oil and gas
production. Project management and the ability to negotiate ventures, partners, optimize performance,
develop markets, limit costs most specifically on third party equipment or services. ExxonMobil’s ability to
operate efficiently and manage expenses while improving yield continuing to enhance productivity and
manage assets is vital. Each aspect of operations are all potential risks also considerations in research
and development, safety, business controls, and environmental risk management, and preparedness for
weather events, natural disasters, and human error.
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3. Exxon Mobil Corporation Financial Information: Solvency, and Liquidity.
Ratio
Current Ratio
Debt / Total Capitalization
Debt Ratio
Debt to Equity Ratio
Times-interest-earned Ratio
=
=
=
=
=
94.14% =
9.58% =
51.44% =
105.95% =
296.59 =
Long-term debt
Notes and loans payable
$
$
Total debt
/
/
/
/
/
Current Liabilities
Total debt / (Total SE + Total debt)
Total Assets
(Total Assets - Total Liabilities)
Interest Expenses
Total Assets
Total Liabilities
$
$
331,052,000,000
170,308,000,000
$ 17,033,000,000
Total Stockholders' Equity
Total debt
$
$
160,744,000,000
17,033,000,000
NC interests share (A/L)
XOM share of equity debt
$
$
Total Capitalization before XYZ
$
177,777,000,000
$ 331,052,000,000
$ 72,963,000,000
$ 170,308,000,000
$ 77,505,000,000
Price as of 12/31/2011
Shares Issued
Total Market Capitalization
$
Total Assets
Total Current Assets
Total Liabilities
Total Current Liabilities
$
83.18
8,019,000,000
667,020,420,000
Treasury Stock
Treasury Stock Value
$
3,285,000,000
273,246,300,000
Market Capitalization
$
393,774,120,000 ii
Income before income taxes
Interest Expenses
9,322,000,000
7,711,000,000
Current Assets
LT Debt + Notes & Loans Payable
Total Liabilities
Total Liabilities
EBIT
7,314,000,000
4,943,000,000
$ 73,257,000,000
$
247,000,000
4. Exxon Mobil Corporation does not have any preferred stock.
5. Exxon Mobil Corporation Capital Structure:
As listed in section 3. Exxon Mobil Corporation capital structure (debt to total capitalization) is 9.58%:
$17,033,000,000 (Total Debt) / $177,777,000,000 (Total Stockholders’ Equity + Total Debt). Exxon’s debt
situation can be itemized with: Interest Expenses: $247,000,000; Long-Term Debt: $9,322,000,000;
Notes and Loans payable: $7,711,000,000. Market capitalization: $393,774,120,000 less Treasury Stock
st
of $273,246,300,000 make a total of $667,020,420,000 capitalization on December 31 , 2011 at the
closing market price of $83.18. Exxon Mobil has 8,019,000,000 shares issued with 4,734,000,000 shares
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outstanding. Additionally, .13% of shares held by insiders, 49.30% held by institutions, 41.29M short
(August 31, 2012) and a short ratio of 3.80.
6. What is the company’s current actual Beta?
Date
S&P
9/4/2012 1465.77
8/1/2012 1406.58
7/2/2012 1379.32
6/1/2012 1362.16
5/1/2012 1310.33
4/2/2012 1397.91
3/1/2012 1408.47
2/1/2012 1365.68
1/3/2012 1312.41
12/1/2011 1257.6
11/1/2011 1246.96
10/3/2011 1253.3
9/1/2011 1131.42
8/1/2011 1218.89
7/1/2011 1292.28
6/1/2011 1320.64
5/2/2011 1345.2
XOM
92.3
87.3
86.29
85.02
78.12
85.2
85.58
85.35
82.18
83.18
78.94
76.18
70.86
72.21
77.33
78.87
80.9
S&P
XOM
-4.04%
-5.42%
-1.94%
-1.16%
-1.24%
-1.47%
-3.80%
-8.12%
6.68%
9.06%
0.76%
0.45%
-3.04%
-0.27%
-3.90%
-3.71%
-4.18%
1.22%
-0.85%
-5.10%
0.51%
-3.50%
-9.72%
-6.98%
7.73%
1.91%
6.02%
7.09%
2.19%
1.99%
1.86%
2.57%
Exxon Mobil
10.00%
y = 0.8757x - 0.0028
R² = 0.5559
8.00%
6.00%
4.00%
2.00%
0.00%
-15.00% -10.00% -5.00%
-2.00%0.00%
Exxon Mobil
5.00%
10.00%
Linear (Exxon Mobil)
-4.00%
-6.00%
-8.00%
-10.00%
Exxon Mobil current beta as calculated from September 1, 2011 to September 4, 2012 is 0.8757.
7. Using the Hamada Formula find the unlevered Beta for Exxon Mobil.
BU = B / [1 + (1 – T) (wd / ws)]
BU = 0.8757 / [1 + (1 – 0.35) (0.0958 / 0.9042)]
BU = 0.8757 / [1 + (0.65) (0.1059500110595001)]
BU = 0.8757 / (1 + 0.0688675071886751)
BU = 0.8757 / (1.0688675071886751)
BU = 0.8192783428352665 = unlevered Beta using Marginal Tax Rate.
BU = 0.8757 / [1 + (0.54) (0.1059500110595001)]
BU = 0.8757 / (1 + 0.0572130059721301)
BU = 0.8757 / (1.0572130059721301)
BU = 0.8283099007042342 = unlevered Beta using Exxon Mobil Effective Tax Rate.
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8. What is the company’s current marginal Tax Rate?
The marginal Tax Rate for Exxon Mobil Corporation is 0.35. The effective tax rate for Exxon Mobil
Corporation is approximately 0.46 (0.4647983768704032). The effective tax rate was calculated with
figures: $36,654,000,000 / $78,860,000,000. (Total income taxes/Total income before taxes)
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9. What is the Cost of Debt, before and after taxes?
For our intents and purposes Exxon Mobil Corporation Cost of Debt can be considered 3.54% before
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taxes. Considering a marginal tax rate of 0.35 Exxon Mobil Corporation Cost of Debt after taxes would
be = 3.54% (0.65) or 2.30%. The cost of debt was calculated using the following data:
Long-term debt
6.250% notes
4.625% notes
5.750% notes
4.900% notes
5.000% notes
5.300% notes
5.650% notes
5.500% notes
6.500% notes
6.100% notes
6.750% notes
6.375% notes
.2% interest
.3% interest
4.2% interest
3.2% interest
8.625 debentures
.1% interest
4.8% interest
8.5% interest
Amount
Rate
Interest
$ 698,000,000.00
0.0625 $ 43,625,000.00
$ 145,000,000.00 0.04625 $ 6,706,250.00
$ 346,000,000.00
0.0575 $ 19,895,000.00
$ 260,000,000.00
0.049 $ 12,740,000.00
$ 138,000,000.00
0.05 $ 6,900,000.00
$ 255,000,000.00
0.053 $ 13,515,000.00
$ 222,000,000.00
0.0565 $ 12,543,000.00
$ 402,000,000.00
0.055 $ 22,110,000.00
$ 506,000,000.00
0.065 $ 32,890,000.00
$ 203,000,000.00
0.061 $ 12,383,000.00
$ 317,000,000.00
0.0675 $ 21,397,500.00
$ 241,000,000.00 0.06375 $ 15,363,750.00
$ 972,000,000.00
0.002 $ 1,944,000.00
$ 311,000,000.00
0.003 $
933,000.00
$ 543,000,000.00
0.042 $ 22,806,000.00
$ 413,000,000.00
0.032 $ 13,216,000.00
$ 248,000,000.00 0.08625 $ 21,390,000.00
$ 2,315,000,000.00
0.001 $ 2,315,000.00
$ 496,000,000.00
0.048 $ 23,808,000.00
$ 260,000,000.00
0.085 $ 22,100,000.00
$ 9,291,000,000.00
non-rated obligations $ 31,000,000.00
total LT debt
Cost of Debt
Cost of Debt * MT rate
$ 328,580,500.00
$ 9,322,000,000.00
3.54%
2.30%
In contrast of the simple calculation from the income statement and balance sheet: $247,000,000 /
$9,322,000,000 yielding a cost of debt ratio of 2.65% which provides an even less accurate number than
above. Unfortunately in my opinion both numbers are highly inaccurate without further analysis unable to
be completed before submission of this assignment. This uncertainty is caused by the inability to
determine XOM’s “Consolidating and Eliminating Adjustments” of $4,844,000,000 in interest expense.
10. Exxon Mobil Corporation does not have preferred stock.
11. Cost of Equity
rs = rRF + (RPM)bi
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Using the 10 year Treasury bond rate for rRF = 1.64% . Given required rate of return = rM = Expected rate
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of return = rM = D1 / P0 + g. Using D1 as 1.93% (S&P 500 current yield rate) and g = .0164 – (-.00637)
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current TIPS 10-year yield + a population growth of .01 & .025. Midpoint = (.01 + .0164 + .00637) & (.025
+ .0164 + .00637) = Midpoint (0.03277, 0.04777) = 0.04027. rM = .0193 + .04027 = 0.05957. RPM = rM –
rRF = 0.05957 - .0164 = 0.04317. Given bi = 0.8757.
rs = 0.0164 + (0.04317) * 0.8757
rs = 0.0164 + 0.037803969
rs = 0.054203969
Cost of Equity = rs = 5.42%
12. Dividend yield
Exxon Mobil issued 4 dividends in 2011. Three dividends were issued in the amount of $.47 per share
and one in the amount of $.44 per share = $1.85 annual dividends per share. At years end Exxon Mobil
Corporation stock price was $83.18. Exxon Mobil Corporation’s dividend yield = $1.85 / 83.18 = 2.22%.
13. Weighted Average Cost of Capital
WACC = wdrd(1-T) + wsrs
WACC = (0.0958 * 0.0230) + (0.9042 * 0.0542)
WACC = 0.0022034 + 0.04900764
WACC = 0.05121104
WACC = 5.12%
14. Price/Earnings Ratio
Based on a Net Income attributable to Exxon Mobil of $41,060,000,000 and a shares issued number of
8,019,000,000 less 3,285,000,000 treasury stock equaling 4,734,000,000 the P/E ratio was calculated by
dividing $41,060,000,000 by 4,734,000,000 equaling $8.67 EPS. Per Exxon Mobil Corporation’s Notes to
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Consolidated Financial Statements note 11 EPS was calculated at $8.43. This EPS was calculated by
$41,060,000,000 being divided by the weighted average number of common shares outstanding of
4,870,000,000. In this analysis of XOM an EPS of $8.67 will be considered.
15. Exxon Mobil Corporation five year stock performance:
XOM
90
80
70
60
50
40
30
20
10
0
rd
rd
From January 3 , 2006 to January 3 , 2012 XOM has the following performance: $54.17 on 01/03/06,
$65.21 on 01/03/07, $76.76 on 01/02/08, $69.77 on 01/02/09, $60.14 on 01/04/10, $77.34 on 01/03/11,
rd
rd
and $84.16 on 01/03/12. From January 3 , 2006 to January 3 , 2012 XOM’s stock increased 55.36%.
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With an adjusted close of $92.30 on September 14 , 2012 XOM continues to have upward momentum.
16. XOM overall risk structure: Operating Risks and Financial Risk
As stated in section 2 of this analysis XOM’s operating risks are driven by large exposure to multiple
markets, economic, and political bodies. Given these factors Exxon Mobil Corporation has a highly
complex capital structure, and tax strategies. With any sophisticated corporation there are financial risks
though XOM appears to have a definitive capital management plan leveraging extremely low financing
options when available and taking a very long-term approach towards business growth. Exxon Mobil’s
capital structure consists of 49.30% held by institutions and approximately 36.50% holdings of treasury
stock. Given this information retail investors make an extremely small percentage of ownership in XOM.
With a beta of 0.8757 Exxon could be considered a less risky investment than an S&P 500 ETF. With
these risks in mind additional research would be recommended into the terms and conditions of the three
long-term debt instruments on the balance sheet with .3% interest; totaling $3,598,000,000 and
accounting for more than a third of Exxon’s debt. Research into the $.24 EPS variance provided in the
financial statements (possibly due to non-controlling interests) and gaining further understanding of
Exxon’s tax strategies (theoretical rate: 35% versus effective rate 46%) would be recommended.
17. Investment Recommendation
Exxon Mobil Corporation’s financials and continued strength of earnings would warrant a buy
recommendation. Using the conservative growth rate of 4.03% the target price for XOM is $97.29. As of
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the adjusted close on September 14 , 2012 XOM’s was $92.30 trading $4.99 less than conservative
estimates would suggest the stock should be trading. Given the current market conditions and transfer of
wealth into stocks Exxon Mobil is poised to continue increasing in value.
18. Bibliography
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ITEM 1A. Risk Factors. Edgar Online: 2011 10-K: http://yahoo.brand.edgaronline.com/displayfilinginfo.aspx?FilingID=8435925-17348-31992&type=sect&tabindex=2
ii
Information obtained from the “Income Statement” & “Balance Sheet.” Edgar Online: 2011 10-K: IS:
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8435925-293284296671&type=sect&tabindex=2 & http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8435925297158-302356&type=sect&tabindex=2
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Same as endnote ii; with additional information following endnote from:
http://finance.yahoo.com/q/ks?s=XOM+Key+Statistics. Some statistics calculated from quarterly reports. All ratios
and numbers calculated in this document aside from these are from Edgar Online: 2011 10-K.
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Yahoo Historical Prices: XOM:
http://finance.yahoo.com/q/hp?s=XOM&a=08&b=14&c=2011&d=08&e=14&f=2012&g=m & Yahoo Historical
Prices: ^GSPC: http://finance.yahoo.com/q/hp?s=^GSPC&a=08&b=14&c=2011&d=08&e=14&f=2012&g=m .
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http://www.irs.gov/pub/irs-pdf/i1120.pdf : Tax is 35% for corporations with income greater than: $18,333,333.
Additional information from: Edgar Online: 2011 10-K http://yahoo.brand.edgaronline.com/displayfilinginfo.aspx?FilingID=8435925-324357-657181&type=sect&dcn=0001193125-12-078102
Note 18. Theoretical tax rate confirmed and effective rate of 46% obtained.
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3.54% Cost of Debt calculated by using interest rates provided in section 13 of the Notes to Consolidated
Financial Statements: http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8435925-324357657181&type=sect&tabindex=2 .
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Bankrate.com: http://www.bankrate.com/rates/interestrates/treasury.aspx?ec_id=m1104701&ef_id=bkpO3YmwsGUAAIrb:20120917081005:s
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http://www.multpl.com/s-p-500-dividend-yield/ .
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http://www.treasurydirect.gov/RI/OFNtebnd .
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http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8435925-324357657181&type=sect&tabindex=2 Notes to Consolidated Financial Statements: Information obtained from Note 11.